Tax revenue target raised to Rs15.26tr, Rs306b tax measures proposed, Rs360b tax cuts announced, provinces
Finance Minister Muhammad Aurangzeb presents Budget 2026-27 in the National Assembly on Friday. — NATIONAL ASSEMBLY X
ISLAMABAD:
Backed by the first-ever provincial allocations of over Rs1 trillion, Finance Minister Muhammad Aurangzeb on Friday unveiled a Rs18.8 trillion federal budget that proposed to significantly reverse punitive taxes imposed on the wage-earning class and the real estate sector, while deepening economic liberalization.
The expansionary budget of Rs 18.8 trillion was 20% or Rs 3.1 trillion higher than the last fiscal year’s revised outlay, indicating the government’s intentions to shift gears from consolidation to spending.
Despite significant contributions from four provinces, the federal government has announced a deficit of Rs7 trillion, which is higher than this fiscal year and will be filled by taking more loans. The government also plans to get $23.4 billion in foreign loans, including $2 billion through euro and panda bonds.
Prime Minister Shehbaz Sharif’s government also reinstated a ban on major purchases above Rs100 million if those assets are not backed by declared white money. But it also sought to encourage capital formation by scrapping the super tax of up to Rs 500 million. annual incomes and lower it to 8% for higher than this threshold. However, the super tax rate will remain at 10% for banks, fertilizer and oil companies.
It was the fifth budget overseen by Prime Minister Shehbaz Sharif since 2022 and the third of his current five-year constitutional term.
Both the government’s ally Pakistan Peoples Party and the opposition party – Pakistan Tehreek-e-Insaf – staged protests, but for different reasons.
The finance minister’s speech was inaudible due to the noise created by PTI demanding the release of its leader Imran Khan. The OPP was protesting high mobile phone taxes and water shortages in Sindh.
Opposition Leader Mehmood Khan Achakzai went to Prime Minister Shehbaz Sharif’s seat and shook hands. There was also a scuffle between a few PTI and PML-N members of the assembly.
The proposed budget appears to be a step towards growth, but a deeper look suggests that the higher spending is mainly for defense purposes and for the construction of water sector projects to counter Indian water aggression.
The Finance Bill 2026-27 aimed to strike a balance between reversing the injustice meted out to the salaried class, helping the real estate sector to kick-start business and lowering the tax burden on the corporate sector. Income from social media was again targeted by imposing a 5% income tax.
The government has proposed a total of over Rs 306 billion in tax measures in the budget, but also provided Rs 360 billion in relief. In addition, the government has proposed enforcement measures worth Rs 354 billion. But FBR’s tax-to-GDP ratio will remain around 10.5% in the next financial year.
The oil and carbon tax targets are set at Rs1.748 trillion for the next financial year on the basis of Rs80 per liter tax. The minister also announced a 7% increase in wages and pensions, which did not make public servants happy.
The salaried class got Rs52 billion in tax relief, while Rs115 billion worth of tax relief was given to the real estate sector. The government imposed 30% federal excise duty on electric vehicles worth up to Rs30 million and 40% on electric vehicles above Rs30 million cost.
The sources said discussions with the IMF on the tax breaks for the real estate sector were still ongoing as the IMF did not favor halving the withholding tax rates.
It also imposed a 5% income tax on income from social media platforms and reinstated a ban on the purchase of major assets if the declared income does not support the purchase. The 18% sales tax has been imposed on hybrid cars.
The government imposed Rs306 billion in additional taxes and took Rs354 billion in enforcement measures to chase the new tax target of Rs15.264 trillion by the Federal Board of Revenue. The Petroleum Levy target is set at Rs 1.68 trillion, climate subsidy tax Rs 50 billion and the tax on electric cars Rs 22.8 billion.
Some of the measures are expected to boost the economy, including the decision to either abolish or reduce statutory duty on 1,914 tariff lines. The government has also proposed to reduce the duty on 3,125 customs positions, including abolishing the 5% duty.
For the first time, three provinces, apart from Balochistan, have given Rs1.035 trillion in grants to FBR on the basis of a Rs15.264 trillion target. In the event of any slippage, the subsidy amount will be automatically reduced. The finance minister said the provincial shares would be determined on the basis of Rs13.35 trillion in taxes and the additional amount of Rs1.9 trillion would go to the federal government, including Rs1.035 trillion provincial share.
For the next fiscal year, four provinces would get a combined Rs8.85 trillion, but out of this, Rs1.035 trillion would return to the federal kitty in allocation. Punjab would get Rs 4.4 trillion but would donate a significant amount of it to the Centre. Sindh would get Rs 2.2 trillion. Khyber-Pakhtunkhwa would get Rs1.44 trillion in gross, including the subsidies.
Muzzammil Aslam, the financial adviser to the KP chief minister, reiterated on Friday that his province would only give money after a meeting with the party’s founding chairman Imran Khan. Khan is serving a prison sentence and is not allowed to meet with the visitors.
For the first time, the government has tried to ease the fiscal constraints by proposing a higher spending framework. The total size of the budget is Rs18.8 trillion, which is Rs3.1 trillion higher than this year’s revised budget.
The proposed federal budget deficit is 4.9% of GDP or Rs 7 trillion, significantly higher than this fiscal year. The federal deficit is Rs1.9 trillion or 36% higher than the outgoing fiscal year, showing that the government is no longer adopting the fiscal consolidation path.
The defense budget has been proposed at Rs3 trillion, which is 16% or Rs413 billion higher than this fiscal year due to hostilities with India and Afghanistan. Out of Rs1 trillion provincial grants, Rs335 billion has been given in the stated defense budget.
In addition, the cost of military pensions is Rs822 billion and Rs319 billion has been given to the Armed Forces Development Programme.
The government projects federal gross receipts at a record Rs20.6 trillion for the next financial year, higher by Rs1.3 trillion or 7%. The gross revenue is based on the FBR’s tax target of Rs15.264 trillion and Rs5.3 trillion non-tax revenue.
The non-tax income will mainly come from the oil tax, where the government wants to collect nearly Rs 1.7 trillion and Rs 1.435 trillion profit from the State Bank of Pakistan. The Rs1 trillion reduction in the central bank’s surplus due to lower interest rates is offset by provincial subsidies that appear as non-tax revenue in the budget.
The Minister of Finance stated that the provinces would provide grants for three consecutive years.
Out of the Rs15.264 trillion FBR tax collections, the provinces will get Rs8.8 trillion as their share of the federal taxes under the National Finance Commission Award.
This leaves the federal government with Rs11.8 trillion in net revenue for the next financial year, which will not be sufficient to meet interest payments and including all defense expenditure. The government will borrow Rs7 trillion in the next fiscal year to finance the Rs18.8 trillion total federal budget.
Over Rs 8 trillion or 43% of the total budget is allocated to interest payments. Pensions would eat up Rs1.17 trillion, subsidies Rs1.1 trillion, running of the civil government Rs1.07 trillion and only Rs1 trillion is given for development.
Under the IMF programme, the four provinces are also required to save Rs 1.8 trillion from their revenues as cash surplus to bring down the national budget deficit to Rs 5.2 trillion or 3.6% of GDP. The
The finance minister announced a Rs 838 billion BISP program aimed at expanding the net to over 12 million beneficiaries and adding more children in the conditional cash transfer programmes.
The government also expects Rs160 billion in earnings from the privatization of electricity distribution companies during this financial year.
The government has estimated to receive $23.4 billion in foreign loans in the next fiscal year, including a transfer of $12 billion in debt from China and Saudi Arabia.
